Current Affairs and Policy Analysis

The European Union Has Hardly Covered Itself in Glory with Brexit

Although the focus in discussions of Brexit is overwhelmingly on the United Kingdom, Brexit is as much about the future of the European Union as it is about that of the UK.

For one thing, the UK leaving is a seismic event for the EU: the UK is the second largest economy in the EU with a 15.0% share of total nominal GDP and the UK’s economy is (slightly) bigger than the total of the smallest 18 member states combined. With Brexit, the number of members of the EU will go from 28 to 27, but in terms of economic weight it is as if it is going from 28 to 10.

For another, as a sovereign entity, the EU is still a work-in-progress, a half-built house. The EU is neither merely a collection of closely cooperating individual countries nor a federation, a United States of Europe. It is somewhere in-between, although up until now it has been evolving inexorably from the former towards the latter.

The problem with the EU, and the key to understanding Brexit, is that it embodies an incomplete and inconsistent form of sharing of sovereignty.

On some dimensions, the EU behaves as if it is single nation state: there is freedom of movement of workers and citizens within the EU; there is monetary union, the euro being the currency of the EU;[1] and, being a customs union, trade policy is the purview of the European Commission. The EU also has many trappings of a single state such as treaties that give it a constitutional basis, a parliament (the European Parliament), an executive (the European Commission), and even a flag and anthem.

On other dimensions, however, the EU operates more like a set of (cooperating) individual countries: although the EU has a small border protection agency,[2] which is being bolstered, the responsibility for policing the external borders of the EU lies with the member states that happen to lie at its edge; the euro area is not a fiscal union – member states retain responsibility for their own fiscal policies, although the European Commission imposes fiscal rules and budgetary oversight on euro area members; and member states have their own military and security forces.

Viewed from this vantage point, Brexit is all about the UK deciding (by a small referendum margin) to repatriate some of the sovereignty it had previously shared with the EU. The UK is attempting to get off the bus of “ever-closer union,” the EU not being a fixed entity but one which is moving slowly but inexorably in the direction of more sovereignty being transferred from the member state to the EU level.

The overwhelming focus in the Brexit debate is on the UK and what a mess the UK polity has made of the Brexit negotiations, as if the EU is just an innocent bystander. I am more critical of the way the EU has handled the whole Brexit process, which has tended to be narrow, bureaucratic and lacking in imagination and flexibility, both in the run-up to, and in the aftermath of, the June 2016 referendum. Rather than high-level political decisions setting the guardrails for the technocratic work needed to give effect to them, all too often the bureaucratic tail has seemed to wag the political dog.

The EU missed an opportunity in 2014-2015 to fold the brewing Brexit issue into a much broader discussion on the future of the EU. If it had done so, and done more to allay the UK government’s concerns, it may have been able to head off the referendum or at least secure a Remain majority result. In March 2017, the European Commission released a White Paper on the Future of Europe, which laid out five possible visions, two or three of which would have had the potential to satisfy the UK’s concerns and keep it in a refashioned EU.[3] But by this time the Leave horse had left the stable.

Once the UK invoked Article 50, setting the clock ticking on the two-year countdown to Brexit, the EU took a hard-nosed, bureaucratic approach rather than a wide-minded, statesmanlike one. The key sentence in Article 50 states that: “In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.” (my emphasis)

It is both common sense and in the right spirit that the EU and the UK should first have sought to reach agreement on the contours of the future relationship and then work back to what that meant for how the UK would withdraw. Once you know the destination, you can decide how to get there. But the EU insisted on doing it the other way around, refusing to discuss the future relationship until certain “divorce issues” had been negotiated and agreed upon: issues related to citizens’ rights; the financial settlement; the Northern Irish border; and other separation issues.[4] It makes little sense to choose your wardrobe and pack your bags, before you have decided where you are headed.

To add insult to injury, after the UK Parliament thrice rejected the Withdrawal Agreement agreed by both parties on November 25, 2018, the EU dug its heels in, refusing to “reopen the Withdrawal Agreement” for most of 2019. The EU refused to negotiate, despite Article 50 stipulating that a Member State’s decision to withdraw from the Union happens “in accordance with its own constitutional requirements” and the European Council stating in its own April 2017 negotiation guidelines that “nothing is agreed until everything is agreed.”

The way the Brexit issue has been framed and treated by the “commentariat” reflects the viewpoint of what might be termed the “cosmopolitan and coastal elites.” There has been a tendency in the mainstream media and in popular commentary in the UK, in the rest of Europe and further abroad to look at Brexit as some kind of horrible mistake – an unfortunate manifestation of “populism” – and to regard supporters of Brexit almost with disdain, as being misguided, nativist or worse. Opponents of Brexit tend to cast the issue in economic terms and play up the short-term economic disruption and costs it would entail, as if the Remain-Leave decision rested on just a narrow economic calculus.

I think this is regrettable. Brexit is not really about economics; it is more about national identity and enough British citizens deciding, when given the choice, to take back part of the sovereignty they had previously ceded to the EU.

It is perfectly legitimate for the UK to decide to leave the EU. The Treaty on European Union allows, under its Article 50, for any Member State to decide to do so. The fact that the treaty basis of the EU allows any Member State to leave the EU, on two year’s notice, may be regarded as a design flaw in the EU’s constitutional foundation: should it be so easy for a country to leave a polity to which it has transferred sovereignty, particularly one whose premise is the pursuit of “ever closer union?” But that is the way it is. Brexit reflects a democratic choice of the British people: it is not “right” or “wrong,” per se.

How do you see Brexit playing out from here? My base case, reinforced by the recent announcement by Brexit Party leader Nigel Farage, is that the Johnson-led Conservative Party will gain a parliamentary majority at the December 12 general election, allowing the Government to secure parliamentary approval of the renegotiated Withdrawal Agreement and Political Declaration and UK to leave the EU on January 31, 2020.

A commonly heard view is that the Withdrawal Agreement will just set up another set of “cliff edges” (when the transition period ends on December 31, 2020 and two years later if the transition period is extended) and the divisiveness (both within the UK and between the UK and the EU) and angst of the past three years will just continue unabated. That may well be the case, but it is also quite possible that Brexit actually happening will serve as a kind of psychological “circuit breaker” on all sides, and negotiations and relations move into a more productive phase, in line more with the sentiment expressed in the Political Declaration.[5]

It is often pointed out that the EU was formed as a political project to put an end to centuries of war in Europe, including two World Wars in the twentieth century. Many see the upsurge in nationalism as a grave concern in that context.There is much validity to this characterization, but the current and future envisaged form of the EU is not the only way that peaceful relations can be secured in Europe. Such a state of affairs should also be achievable under a more flexible, “concentric circle” form of configuring relations among European nation states. In fact, pushing ahead with more integration and centralization of sovereignty without securing the necessary support and mandate from member state electorates could just exacerbate the perceived “democratic deficit” in the EU and end up being counter-productive.

What are the consequences of Brexit for third countries such as the US, Australia and China? That depends on what kind of trade deals the UK is able to put in place with the EU and with other countries. In general, the potential negative impacts of Brexit for the UK’s trade with the EU and its potential (steady-state, full-employment) growth are overstated. The UK and the EU have existing deep trading ties, neither are going anywhere geographically, the Political Declaration both sides have agreed to envisages a very close future economic relationship, and the EU runs a significant trade surplus with the UK. Incentives to maintain a close trading and economic relationship are strong.

To the extent that Brexit does cause substantial disruptions to the amount and pattern of UK-EU trade, they are likely to be mainly short-term in nature. In the long term, after all Brexit-related adjustments to the pattern of consumption, production, investment, asset prices, and policy variables have taken place, the UK economy will be at full employment again. The question then is, what will the impact be on the UK’s potential growth rate relative to the counter-factual of Brexit never having happened? One argument is that UK potential growth will be lower because of the impact of the loss of two-way seamless trade and investment access to a huge market on its doorstep.

However, this outcome assumes that the EU, contrary to its own economic interests but perhaps reflecting political self-survival instincts, continues to play hard-ball with the UK; but to the extent that it does, presumably the UK will have incentives to move in the direction of becoming “Singapore on the Thames” and gear its international economic policies to the more rapidly growing areas of the world, notably the US, India and China, and, unencumbered by membership of the EU, will be nimble enough to be able to do so. The long-run impact of Brexit on UK potential growth is uncertain, but reasonable arguments can be made that it has either sign.

Although the focus of Brexit discussions is overwhelmingly on the perceived negative ramifications of Brexit for the UK, I think that the longer term (5-10 year horizon) challenges are likely to be more serious for the EU27 than for the UK.

Granted, there is a non-negligible chance that Brexit leads to a break-up of the UK, given the simmering independence movement in Scotland and the possibility of the complicated treatment of Northern Ireland under the Johnson-negotiated Withdrawal Agreement may give impetus to a reunified island of Ireland agenda.

That said, the challenges that the EU face in completing, or at least fortifying and making fit-for-purpose, its half-built economic and political house are formidable. To do so will require the 27 member states to agree to further substantive pooling of their sovereignty (for example, by adding a fiscal union to the monetary union of the euro and by the EU taking over substantial “ownership” of the EU external border from the member states concerned); there does not appear to a broad electoral support to do that. But the economic costs of not reforming the EMU (economic and monetary union), in particular, are high. A sobering statistic is that the level of real GDP of Italy, the fourth largest economy in the EU, is still 5% below its pre-crisis (Q1 2008) peak, not to mention that of Greece being 23% below.

The risk is that EU political elites push on with their “ever closer union” agenda, without broad electoral consent, and exacerbate the EU’s already problematic “democratic deficit” in the process, leading to a “populist” backlash. The recent process surrounding the nominations by the European Council to fill senior EU posts, particularly that of European Commission president, the key executive position in the EU, does not augur well in that regard. Notably, the nascent Spitzenkandidaten system, whereby the European Council, in one interpretation of its obligations under the Lisbon Treaty, was supposed to nominate the lead candidate of the party group garnering the most seats in the May 2019 European Parliament election, hit a road-block, and the selection process reverted to back-room horse-trading.[6]

Paul Sheard is an economist, and a Senior Fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. He was formerly Vice Chairman of S&P Global, and has held other senior positions in Tokyo and New York.

[1] Nineteen of the current 28 member states have adopted the euro, an act which ostensibly is supposed to be irreversible (strictly speaking, it is not membership of the euro that is irreversible, but the exchange rate at which a member state joins the euro). Only the UK and Denmark are not obliged to join the euro area. Other member states not in the euro (currently Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, and Sweden) are supposed to adopt the euro after fulfilling certain criteria membership, although Sweden has indicated it does not intend to.

[2] The European Border and Coast Guard Agency (Frontex) has about 300 staff, but currently no border guards or equipment, and plays mainly a coordinating, technical and support role. Following the 2015-2016 refugee crisis, the EU has moved to expand and upgrade Frontex, aiming to have 10,000 Frontex border guards in place by 2027. In her candidacy speech to the European Parliament on July 16, 2019, European Commission President-elect Ursula von der Leyen pledged to try to achieve this goal by 2024.

[3] The five scenarios were labelled: “carrying on,” “nothing but the single market,” “those who want more do more,” “doing less more efficiently,” and “doing much more together.”

[4] The European Council’s Guidelines for Brexit Negotiations (April 29, 2017) held that: “an agreement on a future relationship between the Union and the United Kingdom as such can only be finalised and concluded once the United Kingdom has become a third country”.

[5] You might not know it from the widespread impression of the UK and EU being at each other’s throats, but this speaks of “an ambitious, broad, deep and flexible partnership across trade and economic cooperation with a comprehensive and balanced Free Trade Agreement at its core, law enforcement and criminal justice, foreign policy, security and defence and wider areas of cooperation”.

[6] Ironically, in her candidacy speech to the European Parliament, European Commission President-elect Ursula von der Leyen, herself an unexpected beneficiary of the breakdown of the Spitzenkandidaten system, plucked at the last minute from the German cabinet, pledged to work with the Parliament to “improve” it.

This article was first published on Briefings for Brexit, and is republished with permission. You may not use, copy, distribute, publish, syndicate, sub-license and transmit the whole or any part of such material in any manner and in any format and/or media without the permission of the original publishers.

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